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Friday, May 22, 2015

War of Attrition Continues

Russia vs. Ukraine: the war of attrition continues

This Tuesday, the Ukrainian Parliament effectively admitted that the country is nearing a default on its foreign debt. The Verkhovna Rada passed a law which allows the government to miss payments on its obligations to private creditors. Ukraine’s Prime Minister Arseniy Yatseniuk said at the Rada that the country needs to pay back $30 billion in foreign debt over the next three years, while the domestic debts due amount to $17 billion. Ukraine’s problems are mounting: last week, the state railway operator, Ukrzaliznytsia, announced a technical default on its domestic and foreign debts worth about $1.5 billion.

In different circumstances, the mood in Ukraine would probably be different in this kind of situation. But currently, the looming default is not Ukraine’s biggest problem. The country is at war and almost every day brings news about military and civilian casualties on the Donbas front. Many Ukrainians are wondering, maybe the foreign investors need to take their share of responsibility for what is going on in what is practically the centre of Europe? Why does Ukraine have to service its debts to the West if it is practically singlehandedly protecting Europe from the Russian aggression?

However, the situation is not as straightforward. In the past weeks, the Ukrainian President and government have been under growing criticism for the lack of reforms and persistent corruption in the country. Many are accusing the leadership of not doing their share to avert the crisis. Many are asking the question, will Ukraine benefit from defaulting and shedding the burden of foreign debt, or will the business continue as usual and the new debts will start piling up without any improvements in the economy or business climate?

In the meantime, the Russian economy is not doing well either. In April 2015, the country’s industrial output dropped 4.5% as compared to April 2014, the biggest rate of decline since 2009, while the IMF expects that Russia’s GDP will drop 3.4% this year. Bankruptcies in the Russian banking sector are piling up while the country’s Deposit Insurance Agency is expected to run out of money this month. However, Russia’s economic situation is still not as dire as Ukraine’s. This hybrid war seems to have entered a stage of a very fragile balance which could be broken by either military or economic means.